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Stock investors can get deep discounts by shifting money to Europe—and looking beyond the colossal companies that are household names in America.

U.S. shares have raced ahead in the past three years. The MSCI USA index has gained 8.6% a year, versus a 1.4% decline for MSCI Europe. Europe's economic challenges are more than priced into its stock markets, says Thomas Melendez, manager of the MFS International Diversification fund. Shares there go for 10.5 times next year's earnings forecast, versus 12 times in the U.S., he says, and although earnings are already plump in the U.S., they still have room to recover in Europe.

The biggest companies in Europe have already been combed over by value investors, but those who take a contrarian approach can still find some bargains among European giants. Bob Smith, manager of the T. Rowe Price International Stock fund, likes a pair of northern financial companies: Zurich private banker
Credit Suisse
(ticker: CS) and Paris insurer
AXA Group CS.FR -1.2421052631578948%AXA S.A.France: ParisEUR23.455
-0.295-1.2421052631578948%
/Date(1427841384000-0500)/
Volume (Delayed 15m)
:
7224817
P/E Ratio
11.99435341179991Market Cap
58004066875
Dividend Yield
4.050309102536772% Rev. per Employee
987568More quote details and news »CS.FRinYour ValueYour ChangeShort position
(CS.France). Each sells for less than book value, an accounting measure of net worth, and has solid growth prospects, Smith says.

U.S. investors willing to scrutinize smaller European companies and eschew the big multinationals will uncover the best value.
Stuart Goldenberg for Barron's

The biggest bargains, however, lurk among the small and midsize European firms that American investors often ignore, either for lack of familiarity or because of a dearth of mutual funds that offer exposure to them. This smaller universe is up 15% year-to-date, but an analysis provided by JPMorgan suggests it would have to rise another 35% to reach historical valuation levels. JPMorgan analysts focused on book value rather than earnings, because earnings tend to swell and recede with economic cycles, skewing valuation math. They also looked at an equal-weight universe of stocks rather than typical indexes, which are weighted by stock-market value and therefore give a handful of large firms the most sway. The analysts also ignored the priciest and cheapest 5% of the European market to get a more accurate read.

They found that European small and midsize companies sell for 1.8 times book, compared with a historical average of 2.5 times book—and well below the 2.2 times book fetched by large European companies. As in the U.S., smaller companies in Europe exhibit faster growth than larger ones, on average. But smaller companies in the U.S. don't carry nearly as deep of a discount to large ones as they do in Europe.

Some 39% of small and midsize European companies sell for less than half of their all-time-high stock prices, compared with just 21% of larger companies. JPMorgan strategist Eduardo Lecubarri thinks the small fry will have another strong year in 2013, as investors increasingly turn to them for bargains.

G4S GFS.LN 0.5780346820809249%G4S PLCU.K.: LondonGBP295.8
1.70.5780346820809249%
/Date(1427837716000-0500)/
Volume (Delayed 15m)
:
4561931
P/E Ratio
0.3006651315789474Market Cap
4563239400.82455
Dividend Yield
3.9350912778904665% Rev. per Employee
10884.8More quote details and news »GFS.LNinYour ValueYour ChangeShort position
(GFS.U.K.) is a United Kingdom-based security company with worldwide operations. The stock took a beating during the London Olympic Games after the company provided too few guards in the eyes of the government, with the fallout since then threatening some of G4S' U.K. prison contracts. But company revenue is nonetheless expected to rise 7% this year, and shares sell for less than 11 times this year's earnings forecast.

Dutch insurer
Ageas
(AGSS.Belgium) is less than one-fifth the size of AXA Group by stock-market value. Both companies sell for only about 60% of book value, but revenue for Ageas is projected to increase 15% this year, versus a slight decline for AXA.

London-based
Inchcape INCH.LN -1.3647642679900744%Inchcape PLCU.K.: LondonGBP795
-11-1.3647642679900744%
/Date(1427837713000-0500)/
Volume (Delayed 15m)
:
940388
P/E Ratio
0.20467339317533523Market Cap
3583137162.79393
Dividend Yield
3.4716981132075473% Rev. per Employee
465401More quote details and news »INCH.LNinYour ValueYour ChangeShort position
(INCH.U.K.) distributes and sells cars, new and used, throughout Europe and in emerging markets worldwide. Revenue and profits are rising, but for now the company brings in just one-third as much revenue as AutoNation in the U.S. Sticker prices favor the London stock; it sells for 11 times this year's earnings forecast, versus 17 times for AutoNation.

There are few mutual funds that exclusively target smaller European companies, but
Mutual European
(MEURX), from Franklin Templeton Investments, typically favors more midsize firms than its peers. It has been a top performer, returning an average of 4.6% a year over the past three years. Enter through the side door only, though: Standard A shares of the fund can cost as much as 5.75% upfront and 1.41% of assets per year, but Z shares, available at mutual-fund marketplaces like Charles Schwab, come with a much smaller transaction fee and more reasonable expenses of 1.11%.

Digging Deeper

Some 39% of small and midsize European companies sell for less than half their all-time highs. As investors look for value, these shares should rise.